November 29, 2023 / Newsletters
The Corporate Transparency Act & Entity Reporting Requirements: What You Need To Know
The Corporate Transparency Act (the “CTA”), which goes into effect on January 1, 2024, was enacted by Congress as part of the Anti-Money Laundering Act of 2020. The stated purpose of the CTA is to combat the use of shell companies engaged in money laundering, fraud, and other illicit activities by establishing a national registry of identifying information about the people who beneficially own or control various business entities. In reality, the CTA will impose compliance burdens on millions of small business entities and their owners, including many of our clients. If you or a trust created by you own or control an interest in a closely-held business entity such as an LLC or corporation, you will likely have a reporting requirement under the CTA.
Under the CTA, information about certain business entities, their owners, and the individuals who formed the entities must be reported electronically to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”), which will maintain the database of this information.[1]
Who Must Report Under the CTA?
The CTA requires each “Reporting Company” to file an informational report listing certain information about the Reporting Company’s “Beneficial Owners.”
What is a Reporting Company? The CTA generally defines a “Reporting Company” to include any entity that is created by filing a document with a secretary of state or any similar office. Common examples of a Reporting Company are corporations, LLCs and limited partnerships. A number of entities are exempt from the definition of a Reporting Company, most notably: (i) tax-exempt organizations, such as private foundations; and (ii) operating entities with more than 20 employees and more than $5 million. The Reporting Company is ultimately responsible for filing the beneficial ownership report.
Who is a Beneficial Owner? A “Beneficial Owner” is defined as an individual who either directly or indirectly: (i) owns at least 25% of the Reporting Company; or (ii) exercises substantial control over the Reporting Company. In general, an individual will be deemed to exercise “substantial control” over a Reporting Company if the individual serves as a senior officer (e.g., CEO, CFO or LLC Manager).
In addition, the Reporting Company must provide reporting information for each “Company Applicant,” generally defined in the CTA as the individual who directly files the document to create or register the Reporting Company.
What Information Must Be Reported?
A Reporting Company must disclose its: (i) name (including trade names and fictitious business names); (ii) address of its principal place of business; (iii) the jurisdiction of formation; and (iv) its taxpayer identification number.
For each Beneficial Owner, a Reporting Company must disclose the Beneficial Owner’s: (i) full legal name; (ii) date of birth; (iii) current address; (iv) identification number (i.e., passport or driver’s license number); and (v) an image of the document with the identification number.
Reporting Companies and Beneficial Owners may apply to obtain a FinCEN Identifier, which is a unique identification number that may be used by repeat filers in submitting reports to FinCEN and would eliminate the need to submit all of the information described above for each separate filing.
When Must This Information Be Reported?
A Reporting Company that was formed prior to January 1, 2024 must file its initial beneficial ownership report by January 1, 2025, giving existing Reporting Companies a full year to comply with the CTA. However, each new Reporting Company formed after January 1, 2024 must file its initial beneficial ownership report within 90 days of its formation.
In addition, certain events will require a Reporting Company to file an updated report within 30 days of the occurrence of the event, such as the change of address of either the Reporting Company or a Beneficial Owner, or the addition or removal of a Beneficial Owner.
How Will This Information Be Reported?
A Reporting Company’s beneficial ownership information must be filed electronically through a secure filing system available via FinCEN’s website. As of the date of this Client Alert, FinCEN is still in the process of developing this electronic filing system.
Beneficial Owner Rules Applicable to Trusts
For many of our clients, interests in business entities such as LLCs and corporations are owned in trusts. If a trust owns an interest in a Reporting Company, then the following individuals named in the trust may be deemed to be indirect Beneficial Owners under the CTA and therefore must provide their reporting information to the Reporting Company:
- The Trustee or any other individual named in the trust with the power to dispose of trust assets.
- A beneficiary of the trust who is the sole permissible recipient of income and principal from the trust, or who has the right to withdraw substantially all of the assets from the trust (note that a beneficiary who is a minor is not required to provide reporting information; instead, the beneficiary’s parent will be required to provide the parent’s information).
- The grantor of a revocable trust.
- For purposes of these rules, an individual’s direct and indirect ownership of a Reporting Company will be aggregated to determine whether the individual is a Beneficial Owner under the CTA.
Some trusts provide for a number of different fiduciary positions, each with different powers over the trust assets; for example, a “Special Administrative Trustee” with the power to vote the shares of stock in a closely-held corporation held in the trust, or a “Special Trustee” with the power to distribute trust principal to the beneficiary for any reason. Under the CTA, these types of Trustees also may need to provide their reporting information to the Reporting Company. In many trusts, identifying all of the individuals who are deemed to be indirect Beneficial Owners may not be immediately clear.
Penalties for Noncompliance
Individuals who willfully provide false information or willfully fail to report complete information may be liable for a civil penalty of up to $500 a day capped at $10,000, although inadvertent errors made after diligent efforts to comply with the CTA are unlikely to lead to the assessment of penalties.
Next Steps
In preparation of the CTA reporting requirements beginning on January 1, 2024, owners of existing Reporting Companies should begin the process of determining which individuals qualify as Beneficial Owners and begin obtaining the required reporting information from those Beneficial Owners. Similarly, grantors and trustees of trusts which own interests in Reporting Companies must review the trust documents to determine which individuals named in the trust may be Beneficial Owners of the Reporting Companies. Prior to forming a new entity, the owners of the entity should determine the identities of its Beneficial Owners under the CTA, and then collect their required information for reporting within the 90 day filing period for newly-formed entities.
If you would like to discuss the CTA requirements and how they may apply to you, please contact us.
[1] Beneficial ownership information that is reported to FinCEN will be kept confidential and only subject to disclosure to (i) federal agencies involved in national security, intelligence, or law enforcement pursuant to an appropriate request or (ii) state and local law enforcement agencies pursuant to court order.